THEME 1: 1.2.

1 Rational decision making

INTRODUCTI
ON TO
MARKETS If a store was to offer you the latest trainers at £50
AND each how many would you buy?
MARKET
FAILURE If the price rose to £75, would this change your
behaviour?

Why is that?

Edexcel 1.2 HOW MARKETS WORK

Economics
 LEARNING OBJECTIVES

By the end of this lesson, you should be able to:

Explain the underlying assumptions of rational

economic decision making:
• consumers aim to maximise utility
• firms aim to maximise profits
 THE UNDERLYING ASSUMPTIONS OF RATIONAL
ECONOMIC DECISION-MAKING

 Maximisation occurs when an economic agent tries

to obtain the most that they can from the economic
activity that they undertake
Rational
choice
theory.  This will differ dependent on the economic agent:
 Households or consumers wish to maximise their
utility or personal satisfaction
 Firms wish to maximise their profits
 Government wish to maximise the welfare of the
population
 BEHAVING RATIONALLY - ECONOMIC
OBJECTIVES

Economic  Economic agents have a variety of economic objectives

objectives are the
use of resources in  They meet these objectives by making use of the factors
order to meet the
goals of an
of production available to them
economic agent
over a period of
 Land, Labour, Capital and Enterprise
time.
 These factors of production are turned into products that
will allow the economic agent to meet their targets
 Economic agents include:
 Households
 Firms What are the economic
objectives of these American
professionals?
 Government
 BEHAVING RATIONALLY - HOUSEHOLDS

Private benefits =
benefits to an
individual or firm The economic objectives of households might include:
through economic
activity.  The maximisation of private benefit from consumption
 Individuals will seek to attain the highest level of
satisfaction available in their consumption of goods
and services
Can there be  The maximisation of private benefit from working
hidden
benefits of
consumption?
 Individuals will seek to attain the highest benefit
available in the supply of their labour
 This might include higher pay or better working
conditions
 BEHAVING RATIONALLY - FIRMS

Profit maximisation

Do you Firms will seek to attain the highest level of profit available in their production of goods and
maximise the services
time spent on
your studies or Profit satisficing
are you satisfied A level of profit below profit maximisation that satisfies the needs of the owners or managers of
with a certain an organisation e.g. working less hours to enjoy more leisure time or behaving ethically
level of work?
Sales maximisation
Some firms will seek to maximise sales, possibly to gain market share

Growth
Some firms seek to maximise their growth potential e.g. through the takeover of other firms
 LEARNING OBJECTIVES

Now you should be able to:

Explain the underlying assumptions of rational

economic decision making:
• consumers aim to maximise utility
• firms aim to maximise profits
 RATIONAL BEHAVIOUR

1 10
In pairs write on to sticky notes a range of decisions you make on a regular or semi regular
basis e.g. buying shoes, choosing where to go at a weekend, buying lunch, buying
sportswear etc.

Place each sticky note on a spectrum as shown above. 1 is 100% irrational and 10 is 100%
rational.

What are the factors influencing whether your behaviour is rational?

If you asked a friend to place the sticky notes on the spectrum on your behalf would they
agree with your assessment of your own behaviour?